Bond Traders Dash for Cash as Fed Hike Odds Soar

Forget all the talk about an escalating trade war damaging the U.S. economy or that the coming midterm elections threaten to throw the political system into disarray. Bond traders aren't buying any of it. In fact, they are loading up on super-safe cash-like instruments as bets on the Federal Reserve raising interest rates two more times before year-end reach a new high.

Demand at the U.S. Treasury's bill auctions this week were on the high side, especially for 52-week bills. The sale attracted bids for 3.76 times the $26 billion that was offered Tuesday, the highest so-called bid-to-cover ratio for that maturity since May 2016. This all makes sense. Because of something bond traders call duration, securities with the shortest maturities lose less of their value when rates rise than longer-term bonds do. Take the benchmark 10-year Treasury note, which has been pummeled over the last few weeks. Its yield is now on the cusp of breaching 3 percent for the first time since the start of August as futures traders are pricing in a total of 3.8 Fed rate hikes for 2018, up from 3.5 this time last month.